We as humans tend to get caught up in media hype about when that next stock market plunge will come. Especially now when the markets have been in the midst of the best run in its history.
At some point what goes up must come down…
In nearly 90 years of market history, if you bought stocks on the absolute worst day the point where the market is at it’s highest peak. The average time to make your money back has been three years. It shouldn’t make you shy away from investing in the markets. But we hear time and time again, “Stay away from the markets because you will lose your money”.
Nobody likes to lose their money but it does not stop us from going to the casino or buying lottery tickets. We gamble with a chance of beating the odds, so why is it that most people believe that they should always beat the markets on performance.
Of course, while we can tolerate three years to get our money back. You’re probably thinking, what if the big one comes and the world ends?
Let’s look at the 2008 financial crisis we thought that was the end, I remember people talking about how we are going back to the Great Depression. If you got in at the peak of the market the worst day, it would have taken 5.5 years to recoup your money.
Not bad considering if you invested the day before the 1929 crash, it would have taken you 25 years to be back in the positive. That’s a long time, even for a long-term investor. Many of the people I’m writing this for did not even have parents who were born when that happened. We are 86 years past that historic fall in times, and the media has no problem reliving that moment in history if the market shows any signs of correction.
So in 90 years of stock market history, only the Great Depression took longer than a decade to recoup your money. And only four times since did it take longer than 5 years to get back to gains.
The Facts:
While economists might disagree over the exact definition of a bear market, most financial professionals consider a 20 percent drop in the market from its previous high to be a pretty good indicator that the market is down. The problem is, few investors actually pick the bottom, and those that do are probably more lucky than smart. The primary factors that drives market prices up or down, and the stock market is no exception. If there are more stockholders who want to sell their stock than there are investors who are willing to buy, the price per share drops, driving the stock market down. Plenty of factors can influence this, company performance, positive or negative news about specific companies or industries, world events and political changes. So once again media creates frenzy as doom and gloom sells, and seriously who wants to hear about the good times being had by all invested in the market.
Potential:
It is possible to make greater returns during a down market than in an up market, for the simple reason that stocks have the potential to move higher from a lower starting point. For example, a $1,000 investment at the stock market’s peak in 1929, just prior to the start of the Great Depression, would have been worth only around $170 by the time the market bottomed out in 1932. But if you had held on to your stocks until 1959, around 27 years, your original investment would be worth more than $9,500, for a total annualized return of around 7.8 percent. If you had waited and invested that same $1,000 at the bottom of the market in 1932, your total annualized return by 1959 would have been 16 percent return on investment. Not bad, but who would have done that because certain doom was happening.
So should we invest when the market is down? That seems obvious but human nature does not allow us to invest in a market going down, as we believe the end will happen. But history shows us that what goes up must come down and what comes down will definitely go up! The graph clearly shows how a market goes up and down… If we follow the market from 1900 we see a steady increase from the beginning to now, yes the market drops but it always rebounds within certain time frame to better than average returns depending on the cycle of the fall.
Whether you buy stocks in an up market or a down market, you are more likely to earn strong, positive returns if you buy stocks for the long haul. Just remember that buying in down markets present opportunities. Holding your investment during a down turn is vital to coming out ahead; as we know if you don’t sell in haste then you have lost nothing. But if you sell because of emotion you must accept the consequence of your losses. You cannot lay blame as history dictates the value of investing for the long term.
The purpose is to show you that you should buy low and sell high but regardless of your timing. You must have a secure financial plan that does not include emotion.
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@ Henley Financial and Wealth Management Inc. 